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Nutter Bank Report, March 2011
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1. Massachusetts Treasury Launches Program to Encourage Small Business Lending
2. Commissioner of Banks Warns Against Unfair and Deceptive Deposit Ad Practices
3. Federal Banking Agencies Consider Dodd-Frank Credit Risk Retention Rule
4. Federal Reserve Covers Higher Dollar Consumer Transactions, and Changes Card Rules
5. Other Developments: Capital Planning, Credit Scores and Electronic Check Clearing
1. Massachusetts Treasury Launches Program to Encourage Small Business Lending
The Massachusetts Treasury has begun inviting Massachusetts banks to participate in a new Small Business Banking Initiative, which seeks to place at least $100 million in state deposits with Massachusetts banks willing to increase their small business lending. The Treasury announced on March 10 that an open, rolling applications process for banks will begin in March and continue through at least September 1, 2011. The Treasury sent official Requests for Qualifications earlier this month to solicit participation from about 200 Massachusetts banks. Those banks selected to participate will enter into a memorandum of understanding (MOU) that will set the terms of their agreement with the Treasury. According to the program guidelines, each MOU will have a 2-year term, subject to the right of renewal by the Treasury for an additional period. The Treasurer, at his discretion, will have the option to extend the duration or increase the amount of funds allocated to the initial phase of the program as needed to successfully meet its objectives. To qualify for the program, a bank must be on the list of banks approved to do business with the Commonwealth of Massachusetts (as maintained by the Division of Banks), have a CRA rating of at least “satisfactory” and be adequately capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Act and the FDIC’s capital regulations. Preference will be given to Massachusetts-chartered institutions. Deposits made to any one institution will not exceed $5 million under the program, and participating banks may accept less than $5 million.
Nutter Notes: To verify compliance with the objective of increased small business lending, participating banks will be required to disclose the number and dollar volume of their small business loans at the time the MOU is signed as well as data on those loans’ share of the bank’s overall loan portfolio. Each participating bank will subsequently be required to report qualifying loans to the Treasury on a quarterly basis, disclose publicly the aggregate number and dollar amount of its qualifying loans, compile on a semi-annual basis an analysis of the jobs created as a result of its qualifying loans, and meet with Treasury officials to assess the program results and the bank’s compliance with its terms. A “qualifying loan” for purposes of the program will be a small business loan determined to have resulted from the deposit of state funds in accordance with the MOU. In addition to the qualification criteria described above, participating banks will be expected to offer interest rates on state deposits no lower than the lesser of the prevailing 3-month LIBOR rate or Massachusetts Municipal Deposit Trust (MMDT) overnight rate at the time the MOU is signed. Rates will be adjusted quarterly, and interest earned must be wired to the Treasury quarterly. State deposits must be fully secured by insurance or collateralization, which may be satisfied by membership in the Depositors Insurance Fund or the Share Insurance Fund. In accepting deposits under the program, banks must commit to use the funds to increase their loans to creditworthy small businesses as defined in Section 57 of chapter 23A of the General Laws. Alternatively, banks may define a commercial loan of $500,000 or less as a small business loan.
2. Commissioner of Banks Warns Against Unfair and Deceptive Deposit Ad Practices
The Massachusetts Commissioner of Banks has issued an advisory letter addressing compliance issues with the advertising of deposit accounts under the federal and Massachusetts Truth in Savings laws and Chapter 93A of the General Laws—the Massachusetts consumer protection statute. The March 8 letter gives examples of 2 advertisements discovered by the Division of Banks during recent monitoring that illustrate practices that may be considered unfair or deceptive in violation of those laws. The first is a newspaper ad prominently displaying a high yield savings rate, which is qualified by a note that the rate may change at any time and stating that the date the advertised interest rate was accurate was 20 days before it was published. The Commissioner’s advisory points out that federal Truth in Savings regulations require that an advertisement disclose an APY as of a specified date that must be recent in relation to the publication. The official commentary accompanying the regulation adds that a daily newspaper ad must reflect rates offered “shortly before” the date the rate is published. The second example given in the advisory letter describes a newspaper ad stating an interest rate and APY for a “free” checking account with no ATM fees. However, the fine print discloses that failure to comply with 4 qualifying terms of the account each statement cycle would result in a substantially reduced interest rate as well as charges for ATM transactions. The Commissioner’s advisory recommends that any and all key component terms governing the availability or the effectiveness of an advertised APY should be prominently stated in the body of the advertisement.
Nutter Notes: The Commissioner’s advisory focuses on whether terms of a deposit account are disclosed in a clear and conspicuous manner. The most prominent account term in each of the problematic advertisements highlighted in the advisory letter was the APY. However, the Division found that the most important term—when the offered rate was available or in effect—was included in the least conspicuous part of each advertisement and that other promotional aspects of the account were featured more prominently. In particular, the letter warns that the advertisement of a “free” account should conspicuously list any requirements that could negate that statement, especially when other promotional narrative comments appear in the advertisement. According to the advisory letter, such strategic adverse placement of vital information is not fair to consumers and is inconsistent with the purpose of the laws intended to provide consumers with a means to compare savings rates and terms. The Commissioner’s letter also appeals to depository institutions to review their advertisements to ensure that consumers receive full and fair disclosure of all material terms of an offer, clearly and conspicuously.
3. Federal Banking Agencies Consider Dodd-Frank Credit Risk Retention Rule
The FDIC and Federal Reserve have approved a proposed rule to implement Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party. The OCC announced on March 28 that it is in the process of considering the same proposed rule along with the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development. Section 941 generally requires a securitizer of asset-backed securities to retain not less than 5% of the credit risk of the assets collateralizing the asset-backed securities, and requires the agencies to issue joint rules implementing the credit risk retention requirement. The term “securitizer” includes both an issuer of an asset-backed security or a person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, to the issuer (i.e., the sponsor of a securitization transaction). Section 941 also includes certain exemptions from the credit risk retention requirement, including an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages” (QRMs) as defined by the agencies in the joint rule. Although the risk retention requirements do not apply to the originator of a residential mortgage loan which is not a securitizer, secondary market investors may require originators, including banks, to structure residential mortgage loans as QRMs so the investors can securitize the loans under the exemption from the risk retention requirements. Comments on the FDIC’s proposed rule are due by June 10, 2011.
Nutter Notes: The proposed QRM definition sets qualification standards that require documentation of income, information about past borrower performance, a debt-to-income ratio for monthly housing expenses and total debt obligations, elimination of payment shock features, a maximum loan-to-value ratio depending on the type of loan, a minimum down payment and other underwriting standards. For example, the proposed QRM standard requires a maximum loan-to-value (LTV) ratio of 80% in the case of a purchase transaction (with a lesser combined LTV permitted for refinance transactions) and a 20% down payment requirement in the case of a purchase transaction. Total points and fees payable by the borrower in connection with a mortgage transaction may not exceed 3% of the total loan amount to satisfy QRM criteria under the proposal. The proposed QRM standard also requires that the ratio of the borrower’s monthly housing debt to monthly gross income not exceed 28% and the ratio of the borrower’s total monthly debt to monthly gross income not exceed 36% within 60 days prior to the closing of the mortgage transaction. FDIC Chairman Sheila Bair pointed out in a statement on the proposed rule that “the QRM requirements will not define the entire mortgage market, but only that segment that is exempt from risk retention.” However, the FDIC is requesting comments on what impact, if any, the proposed QRM standards might have on pricing, terms, and availability of non-QRM residential mortgages, including availability to low- and moderate-income borrowers.
4. Federal Reserve Covers Higher Dollar Consumer Transactions, and Changes Card Rules
The Federal Reserve has issued a number of finals rules that amend Regulation Z (Truth in Lending) to implement the Dodd-Frank Act’s expansion of the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts and to clarify aspects of the rules that implement the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) of 2009. The Federal Reserve approved 2 final rules on March 25 that will amend Regulation Z and Regulation M (Consumer Leasing) to apply the protections of the Truth in Lending Act and the Consumer Leasing Act to consumer credit transactions and consumer leases (including auto leases) up to $50,000, compared with $25,000 under the current rules. The new threshold will be adjusted annually to reflect increases in the consumer price index. Currently, consumer loans of more than $25,000 are generally exempt from the Truth in Lending Act. (Private education loans and loans secured by real property (such as mortgages) are subject to the Truth in Lending Act regardless of the amount of the loan.) The Consumer Leasing Act requires lessors to provide consumers with disclosures regarding the cost and other terms of personal property leases. Currently, a lease is exempt from the Consumer Leasing Act if the consumer’s total obligation exceeds $25,000. The amendments to Regulations Z and M will become effective on July 21.
Nutter Notes: The Federal Reserve on March 18 approved a final rule amending Regulation Z to clarify aspects of prior rules implementing the Credit CARD Act of 2009. The new rule provides enhanced protections for consumers who use credit cards and resolves areas of uncertainty for card issuers related to their compliance obligations. The Credit CARD Act requires that, before opening a new credit card account or increasing the credit limit on an existing account, card issuers consider a consumer’s ability to make the required payments on the account. The new rule addresses practices that can result in decisions to approve applications by consumers who lack the ability to pay. Specifically, the rule provides that credit card applications generally cannot request a consumer’s “household income” because that term is too vague to allow issuers to properly evaluate the consumer’s ability to pay. The new rule requires credit card issuers to evaluate a consumer’s ability to pay based on individual income or salary. In addition, the rule clarifies that promotional programs that waive interest charges for a specified period of time are subject to the same Credit CARD Act protections as promotional programs that apply a reduced rate for a specified period. The Credit CARD Act amendments to Regulation Z become effective on October 1.
5. Other Developments: Capital Planning, Credit Scores and Electronic Check Clearing
- OTS Recommends Capital Adequacy Assessments
The OTS issued guidance on March 15 recommending that all savings associations conduct an assessment of their capital adequacy. The memo to CEOs also recommends that the capital planning process result in capital targets appropriate for the savings association’s risk profile and business plan, and the development of contingency plans for addressing stress scenarios to which the savings association may be particularly vulnerable.
Nutter Notes: According to the guidance, OTS examiners will consider compliance with regulatory capital requirements, the quality of capital, holding company strength, the savings association’s capital planning process, and the extent to which that process is forward-looking and risk-focused in assessing capital adequacy. Examiners will also review the adequacy and reasonableness of internally established capital targets, and the savings association’s plans for meeting and maintaining those targets.
- Joint Proposed Rule Would Implement Dodd-Frank Credit Score Disclosures
The Federal Reserve and the Federal Trade Commission on March 1 released a proposed rule to implement the credit score disclosure requirements of the Dodd-Frank Act. The statute requires creditors to make certain disclosures to consumers in risk-based pricing and adverse action notices under the Fair Credit Reporting Act if a credit score was used in setting the credit terms or taking adverse action.
Nutter Notes: The proposed rule would amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices and to add related model forms to reflect the new credit score disclosure requirements. The Federal Reserve also proposed conforming amendments to certain model notices in Regulation B (Equal Credit Opportunity). Comments on the proposed rules are due 30 days after publication in the Federal Register, which is expected shortly.
- Federal Reserve’s Proposed Rule Would Encourage Electronic Check Clearing
The Federal Reserve issued a proposed rule on March 3 that would amend Regulation CC (Availability of Funds and Collection of Checks) to encourage banks to clear and return checks electronically, add provisions that govern electronic items cleared through the check-collection system, and shorten the exception hold periods on deposited funds. Comments on the proposal are due by June 3.
Nutter Notes: The proposed rule provides that a depositary bank would be entitled to the expeditious return of a check only if it agrees to receive returned checks electronically. In addition, the proposal would shorten the safe-harbor period for an exception hold to four business days.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:
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